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With news of the Federal Reserve’s decision to raise interest rates this month, real estate experts are waiting to see how this will affect the market. Although rising interest rates are associated with a burgeoning economy, it isn’t yet clear how the market will react to these changes. To get a better picture of how rising rates will affect Los Angeles luxury real estate, it is important to understand how interest has fluctuated in the last nine years.
Interest Rates and the 2008 Housing Crisis: A Brief History
During the housing crisis in 2008, the Federal Reserve dropped interest to 0% in its efforts to resuscitate the economy. As the economy began to improve over the years with legislation like the Dodd-Frank Act, the reserve began to raise rates in small increments in 2015 and 2016.
In 2017, the economy has slowly continued its upward trend and has faced its first interest increase this month. According to CNN, “the rate increase is a sign that the U.S. economy no longer needs as much help from the Fed.” As the economy begins to improve, interest rates will rise, and the housing market will react.
Rising Interest Rates in 2017 and the Future of Housing in LA
Last week, the Federal Reserve raised its interest rate a quarter of a point from 0.75% to a full percent. According to The Wall Street Journal, federal experts expect two more quarter point raises in 2017 and at three more in 2018.
Rises Due to a Healthy Economy & Inflation
Experts cite two reasons for the increase. Firstly, the increase is a direct response to the economy’s health. “The simple message is the economy is doing well,” says Janet Yellen, Federal Chairwoman. “We have confidence in the robustness of the economy and its resilience to shocks.” The second reason for the increase is due to inflation. After years of undershooting, feds say that they are within grasp of their 2% target. Although the reserve expects inflation to fluctuate slightly above or below that target, the 2% mark remains its goal. Yellen explains, “2% is not a ceiling on inflation. It’s a target.” For L.A.’s luxury real estate market, the increased rates are bittersweet. Mostly, the rise indicates that obtaining a loan will be more difficult and expensive. Increased difficulty in obtaining a loan means that fewer buyers will be able to purchase homes, thus slowing down the market. The brighter side of higher interest is that sellers are likely to respond by knocking off thousands, or even millions, off their asking prices in an effort to encourage more buyers.
Challenges from Rising Interest Rates
Economists foresee three challenges resulting from the increased rates. Firstly, experts are concerned that officials may overestimate the market and make changes too quickly. If lawmakers remove support before the economy has fully stabilized, this could cause the market to falter.
Another problem that may arise is raising rates too slowly. If the market suddenly starts to improve and officials do not raise rates fast enough, this may cause the economy to overheat. A third possible risk is that the reserve’s efforts to control inflation may directly oppose President Trump’s agenda. During his campaign, Trump proposed to stimulate the economy through job creation and retrieve jobs from overseas.
If the reserve’s efforts to improve the economy clash with Trump’s programs, this could also harm the market. Trump has already been very critical of Yellen, whose position will soon be open along with two other governorship chairs.
Interested in Politics and Real Estate?
Read how recent legislation like the Dodd-Frank Act might affect Los Angeles luxury real estate. Stay up-to-date on the latest market trends or contact one of our top real estate agents to help you navigate the ever changing world of real estate.